Monday, June 8, 2009

"So what exactly is this economy business anyhow?" Pt. II

So now that we're up to snuff on the The Holy Trinity of Economics Questions, let's see how we can go about answering them.

First off, people are largely the ones who take resources and turn them into goods (though bees might produce honey, they still don't package it and deliver it to us. Yet.) or produce services. We call these resources the factors of production which I will outline below:

-Natural resources are provided by, you guessed it, nature. This can be anything from iron ore, to fertile land, oil and gas (the stuff underground, not the stuff that Uncle Herb produces), water, and Bono's fertile imagination.

-Labor is the physical or mental effort that people exercise to produce a good or service. At your favorite fast food joint the cook heats a hamburger patty (the raw material) and throws it into a bun and wraps it with paper (the product) and the squeaky-voiced kid with the headset takes your money and hands you your greasy prize (the service). Note that this doesn't apply to sandwich artists. Those people create mayonnaise-drenched works of art, apparently.

-Physical capital is all the equipment machinery, buildings, tools, infrastructure and other physical objects that are used to produce goods and services. The fast food cook can't cook your freedom fries without a deep-fryer and the cashier can't keep your food warm for hours before you buy it without those orange lamps. Even sandwich artists need a palette and canvas (i.e. rows of colorful tubs filled with ingredients and some waxy paper).

-Human capital is the knowledge and skills required to do the job which are acquired through experience or education. This is why fast food places have an orientation so they can train their teenaged worker-bees on the many arcane aspects of grilling "meat" and how to push buttons on a cash register. Getting them to get your order right, on the other hand, is a much more advanced discipline. Sandwich artists, conversely, are born with their talent. That's why they are artistes!

-Entrepreneurship (stop with the ugly words!) is the effort exerted to coordinate the other aforementioned factors of production to produce and sell products. The entrepreneur is the one who comes with the idea ("what if we could produce full-cooked 'food' nearly instantaneously for people in a hurry?"), decides how to produce it ("We'll use teenagers who need to learn the value of working and have them operate utterly simple machines!"), and raises the cash to bring the idea to the marketplace ("I get a loan from the bank, I build a building with some machines in it, and I buy cheap killing-room floor scraps from the meat-packing plant to create my product!"). Well, we can only assume that was Ray Kroc's vision, anyway.

In a free market, the entrepreneur is half of the equation on who gets to answer the three economic questions. The other half of the equation is consumers: the people who ultimately buy (or don't buy) the product. In a free market the questions are answered through the millions of transactions that take place everyday; when someone has a good idea and can produce it as cheaply as possible, more people will buy this product. When someone has a bad idea (like Crystal Pepsi), then people don't put forth the cash to buy it, thus telling the entrepreneur in no uncertain terms, that their idea for transparent cola is a stupid one.

And good ideas become better ideas when someone takes an idea and improves on it to make it easier to produce and more accessible to more people. Consider that automobiles were originally a luxury only the wealthiest people could afford but as society got richer overall (because we got more productive and innovative) and innovation led to cheaper and easier forms of production, prices of automobiles dropped as real wages and the standard of living went up. Now people in all social classes have access to automobiles to some degree or another. Jetson-styled flying cars, on the other hand, we're still waiting for.